I ditched corporate America in 1994 and started a management consulting and venture capital firm (http://petercohan.com). I started following stocks in 1981 when I was in grad school at MIT and started analyzing tech stocks as a guest on CNBC in 1998. I became a Forbes contributor in April 2011. My 11th book is "Hungry Start-up Strategy: Creating New Ventures with Limited Resources and Unlimited Vision" (http://goo.gl/ygaUV). I also teach business strategy and entrepreneurship at Babson College in Wellesley, Mass.

Why Groupon Is Over and Facebook And Twitter Should Follow

Investors are giving up on Groupon (GRPN) and they’re scrambling for the exits on Facebook (FB) too. Since Twitter is not publicly traded, they can’t get out of that one as quickly.

But social media attracts consumers because of dopamine — and like any drug — those consumers need a bigger dose to get the same effect. Social media’s inability to deliver that is at the root of what makes it hard for it to grow into its lofty valuations. Not only that, but it’s failing to come up with compelling ways to earn a return on spending to turn those consumers into repeat customers.

The list of investors getting out of Groupon shares contains prominent names. They include Andreessen Horowitz, Hedge fund Maverick Capital Ltd., and Fidelity Management & Research Co, according to the Wall Street Journal. Others like Kleiner Perkins Caufield & Byers and Morgan Stanley (MS) are bullish on Groupon, reports the Journal.

Groupon and the whole daily deal business are under pressure because so many participants offer a money-losing proposition to merchants. In June 2011, I wrote that the SEC should spare investors the agony of losing their money when Groupon sold its shares to the public. The SEC did not listen to me (no surprise there); Groupon went public in November 2011, and that day’s Groupon stock buyers are now 82% poorer.

But Groupon’s biggest victims are the small businesses that get suckered in to accepting Groupons. Restaurants lose money on them because consumers flood the restaurants, order very low priced meals, strain waiters and cooks, get lousy service, and never return.

Examples abound. As I wrote in June 2011, a restaurant in Portland, Ore. believes its decision to work with Groupon was its worst business decision ever – costing it $8,000. And according to the New York Times, Muddy’s Coffeehouse –it serves coffee and granola – had to take out a loan to cover its Groupon losses.

Muddy’s gave Groupon customers $24 worth of food and coffee for $12. It paid Groupon half of its revenues, drew in crowds, lost money, and would have shut down were it not for that loan. As owner, Dyer Price, told the Times, “They don’t warn you that you’re going to get hit really hard and that you have to be prepared. We will never, ever do it again.”

Customers and daily deal providers are bolting. UnsubscribeDeals.com — it unsubscribes people from daily deal e-mails – got 7,800 unsubscribers in its first three months and doubled in July, reported the Times. Daily Deal Media reported that in the last six months of 2011, 798 daily deal sites shut down.

I interviewed Ben Edelman, a professor at Harvard Business School, about this. He pointed out there are good daily deal sites. For example, Restaurant.com has been around for over a decade because it creates value for restaurants and consumers. “Restaurants like the fact that it does not require them to pay for the daily deal and that it lets them add restrictions to push business towards slow nights,” said Edelman. By contrast, Groupon tends to disallow such restrictions.

And Edelman believes that while consumers might initially be frustrated that they can’t get the discount on Saturday, the value they’re getting is sufficient that they might be quite happy to try the restaurant on a Thursday. They will likely get better service and perhaps consider coming back to pay full fare in the future.

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The logic in this article with respect to time spent on a service equating to lost productivity so weak it’s not even funny, my favorite quote “That’s not all — I estimate that Facebook is cutting U.S. productivity by 9.4%. That’s because a study in May 2011 found that Facebook users in the U.S. spend an average of 15 hours and 33 minutes a month on the site. And if that time was spent working instead, those Facebook users could add $1.4 trillion to the U.S. economy.” While I am no economist by a long shot, I don’t think you can directly correlate overall average usage of a service to lost productivity, by the articles logic TV, which people watch for an average of 35 hours per week, or 140 hours a month , according the the Nielson blog, should have reduced the US economy’s potential by something along the lines of $12.6 trillion, which according to the interblarghs is the equivalent of the 84% of what the actual GDP is ($15 trillion according to google).

An entire article that ends up chastising the American people for averaging an entire half hour per day in socializing with people via social media. This is some monumental reporting – especially in light of the citizens of the United States already working more hours than anyone in the western world, as well as the battered state of our economy, where desire for jobs far, far outstrips the interest in providing them.

Please excuse me while I go continue to maintain contact with my many, many friends around the world at the cost of the trillions of dollars.

Well, I do think that groupon is done. I signed up for it a while ago but have only used one or two deals. Facebook, I’m no stock expert, but if someone had asked me if they should invest in Facebook I would have said no. Facebook has grown just about as big as they’re going to get. Everyone knows about Facebook and either has one or has sworn it off. I definitely agree with this author that the more Facebook tries to monetize its customers the more it will turn them off. Of course, this is what I think about the current trend of casual, social, free-to-play, and MMO games. We’ll see what happens.

I don’t know if I’d say Facebook is done though. Until a viable alternative comes around, people like to use Facebook to keep in touch so I can’t see it failing. Not on account of users at least. If they go out of business because of this foolish decision to go public, that’s another story.

Groupon was never anything more than an online version of the print edition of what’s called The Entertainment Guide; a publication that has printed coupons for the same discounts across the US. It’s often sold by non-profits such as Boy Scouts and schools as a fund raiser. $35 a piece. Perhaps wealthy investors have never seen one and so thought Groupon some kind of breakthrough investment whose value was artificially inflated because of investor interest whereas it has always been just a copy cat. Same with Living Social. Great if you want to grab up front profits by getting in and out quick but a fraud if you bought Groupon stock for the long haul. Those who talked you into it are laughing all the way to the bank.

i don’t think drug is a good metaphor. How many drug addicts have you seen who give up drugs voluntarily because it cannot deliver additional dopamine forever? If social media is really like taking drugs, investors should buy more FB stock right away.

Be careful. There’s a difference between the value of the product and the value of the company. I love groupon and facebook but would never buy their stock. The stock valuations were so that investors could get their money out. There was absolutely no way either company’s stock would generate a return for those who bought the stock after the IPO. The only strategists who invested post IPO were those who mistakenly thought the hype might push the value up.

Now that the stock is sold, will the companies survive? Groupon has been operating at a profit and actually had a net profit this past quarter. Many people still use it. So I think the company is viable and won’t be checking out any time soon. Facebook is sitting on so much cash and investment assets that they can ride out a lot. They’ve been doing a lot of R&D which I think is a waste. But they can be profitable if they tighten their belt and ride their success. They aren’t going away soon, either.

So, this just seems like a silly story from a cranky Luddite who doesn’t see how social media works and can’t read a financial statement. I certainly agree with the sentiment, however. Anyone who invested post IPO should be a little upset with themselves and be a little disheartened with this whole new emerging market thing. But otherwise there’s nothing to read here.

How are you getting 9.4% productivity loss from 15.5 downtime hours a month?

And thinking that people not checking their Facebook is going to somehow magically add money to the economy….thats just economic voodoo. No one is shutting down vehicle production lines or letting burgers burn on the grill just so they can go check their friends’ status updates.